Moody's cuts Wells Fargo after Wachovia deal

NEW YORK, Jan 6 (Reuters) - Moody's Investors Service on Tuesday downgraded ratings on Wells Fargo and Co. on concerns that the bank's acquisition of Wachovia Corp has undermined its credit quality as it takes on the additional risk of Wachovia's loan book.

Moody's cut Wells Fargo's (WFC.N) senior debt ratings by two notches to "Aa3," or the fourth-highest investment grade, and said the outlook is negative, meaning it could lower the rating again within the next two years.

The agency also cut the bank's financial strength rating by three notches to "B," which changes the company's baseline credit assessment to "Aa3" from "Aaa."

"The deterioration in Wells Fargo's stand-alone credit quality, as captured in the downgrade to a "B" financial strength rating, is a consequence of its Wachovia WB.N acquisition, which has lowered Wells Fargo's capital ratios and increased asset quality concerns," Moody's said in a statement.

Wells Fargo paid about $12.7 billion for Wachovia in a deal that closed in January and created the fourth-largest U.S. bank by assets.

Wells Fargo has already said it will write down $71.4 billion of Wachovia's $482.4 billion loan portfolio, including $36 billion of option adjustable rate mortgages, and $9.6 billion of commercial real estate. See [ID:nN01331367].

Wells Fargo's leverage is unlikely to improve before 2010 because the company will need to set aside high loan-loss provisions, and that will weigh on earnings, the agency said.

The slump in the housing market and rising unemployment are expected to boost provisions at a time when revenue is likely to be weaker, it said.

"Wells Fargo's capital structure is now more skewed towards hybrid securities -- as opposed to common equity," which is more supportive to bondholders, said the agency.

Moody's also adjusted Wachovia's ratings to match those of its new parent, upgrading the senior debt rating by one notch to "Aa3." (Reporting by Ciara Linnane; Editing by Leslie Adler)